SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 28, 2002
Commission file number: 1-5256
----------------------------
V. F. CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1180120
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
105 CORPORATE CENTER BOULEVARD
GREENSBORO, NORTH CAROLINA 27408
(Address of principal executive offices)
(336) 424-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
On October 26, 2002, there were 108,652,991 shares of the registrant's Common
Stock outstanding.
VF CORPORATION
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Income:
Three months and nine months ended September 28, 2002
and September 29, 2001 ........................................ 3
Consolidated Balance Sheets:
September 28, 2002, December 29, 2001
and September 29, 2001 ........................................ 4
Consolidated Statements of Cash Flows:
Nine months ended September 28, 2002
and September 29, 2001 ........................................ 5
Notes to Consolidated Financial Statements .......................... 6
Supplemental Financial Information:
Consolidated Statements of Income for 2002, by Quarter ........ 17
Consolidated Statements of Income for 2001, by Quarter ........ 18
Business Segment Information for 2002, by Quarter ............. 19
Business Segment Information for 2001, by Quarter ............. 20
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 21
Item 3 - Quantitative and Qualitative Disclosures about Market Risk ........ 28
Item 4 - Controls and Procedures ........................................... 29
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K .................................. 29
SIGNATURES ...................................................................... 30
CERTIFICATIONS .................................................................. 31
2
VF CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 28 SEPTEMBER 29 SEPTEMBER 28 SEPTEMBER 29
2002 2001 * 2002 2001 *
---- ------ ---- ------
NET SALES $ 1,400,389 $ 1,406,659 $ 3,772,907 $ 3,986,691
COSTS AND OPERATING EXPENSES
Cost of products sold 871,117 913,641 2,380,561 2,601,710
Marketing, administrative
and general expenses 321,027 301,159 904,722 904,336
Other operating (income) expense, net (8,070) 2,302 (17,891) 10,135
----------- ----------- ----------- -----------
1,184,074 1,217,102 3,267,392 3,516,181
----------- ----------- ----------- -----------
OPERATING INCOME 216,315 189,557 505,515 470,510
OTHER INCOME (EXPENSE)
Interest income 1,888 1,616 5,107 5,100
Interest expense (21,868) (23,320) (57,201) (72,421)
Miscellaneous, net 696 166 2,222 (1,485)
----------- ----------- ----------- -----------
(19,284) (21,538) (49,872) (68,806)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING POLICY 197,031 168,019 455,643 401,704
INCOME TAXES 68,467 64,810 161,552 151,758
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY 128,564 103,209 294,091 249,946
DISCONTINUED OPERATIONS, NET OF INCOME TAXES (315) 351 2,020 481
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
POLICY FOR GOODWILL -- -- (527,254) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 128,249 $ 103,560 $ (231,143) $ 250,427
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC
Income from continuing operations $ 1.16 $ 0.92 $ 2.61 $ 2.21
Discontinued operations, net of income taxes -- -- 0.02 --
Cumulative effect of change in accounting policy -- -- (4.82) --
----------- ----------- ----------- -----------
Net income (loss) $ 1.16 $ 0.92 ($2.19) $ 2.21
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Income from continuing operations $ 1.15 $ 0.90 $ 2.60 $ 2.17
Discontinued operations, net of income taxes -- -- 0.02 --
Cumulative effect of change in accounting policy -- -- (4.82) --
----------- ----------- ----------- -----------
Net income (loss) $ 1.15 $ 0.90 ($2.20) $ 2.17
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 108,767 111,309 109,450 111,611
Diluted 111,849 114,563 112,737 115,144
CASH DIVIDENDS PER COMMON SHARE $ 0.24 $ 0.23 $ 0.72 $ 0.69
* Reclassified to conform with 2002 presentation in accordance with FASB
Statement No. 144.
Note: If the nonamortization provisions of FASB Statement No. 142 had been
applied at the beginning of 2001, income from continuing operations before
cumulative effect of change in accounting policy would have been $111,229 and
$274,982 for the third quarter and nine months of 2001, respectively. Basic and
diluted earnings per share from continuing operations before cumulative effect
of change in accounting policy would have been $.99 and $.97, respectively, for
the third quarter of 2001 and $2.44 and $2.40, respectively, for the nine months
of 2001.
See notes to consolidated financial statements.
3
VF CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
SEPTEMBER 28 DECEMBER 29 SEPTEMBER 29
2002 2001 * 2001 *
---- ------ ------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 254,977 $ 332,049 $ 133,080
Accounts receivable, less allowances:
Sept 28 - $52,821; Dec 29 - $60,449;
Sept 29 - $48,416 744,918 572,012 741,589
Inventories
Finished products 628,865 621,055 752,789
Work in process 128,274 116,864 121,205
Materials and supplies 121,497 128,646 158,364
----------- --------- -----------
878,636 866,565 1,032,358
Other current assets 158,389 155,183 147,287
Current assets of discontinued operations 7,343 105,611 94,792
----------- --------- -----------
Total current assets 2,044,263 2,031,420 2,149,106
PROPERTY, PLANT AND EQUIPMENT 1,546,326 1,643,368 1,681,757
Less accumulated depreciation 976,561 1,001,031 997,364
----------- --------- -----------
569,765 642,337 684,393
GOODWILL 474,500 998,046 1,016,561
OTHER ASSETS 406,152 395,912 392,152
NONCURRENT ASSETS OF DISCONTINUED OPERATIONS 4,178 35,301 91,756
----------- --------- -----------
$ 3,498,858 4,103,016 $ 4,333,968
=========== ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 56,768 $ 77,900 $ 113,916
Current portion of long-term debt 562 696 6,340
Accounts payable 270,950 240,292 242,466
Accrued liabilities 576,350 440,307 476,674
Current liabilities of discontinued operations 16,046 54,638 35,623
----------- --------- -----------
Total current liabilities 920,676 813,833 875,019
LONG-TERM DEBT 602,550 904,035 904,218
OTHER LIABILITIES 232,588 228,501 216,498
REDEEMABLE PREFERRED STOCK 40,491 45,631 46,340
DEFERRED CONTRIBUTIONS TO EMPLOYEE
STOCK OWNERSHIP PLAN -- (1,780) (3,248)
----------- --------- -----------
40,491 43,851 43,092
COMMON SHAREHOLDERS' EQUITY
Common Stock, stated value $1; shares
authorized, 300,000,000; shares
outstanding; Sept 28 - 108,252,368;
Dec 29 - 109,998,190;
Sept 29 - 110,757,334
Common Stock 108,252 109,998 110,757
Additional paid-in capital 926,780 884,638 878,577
Accumulated other comprehensive income (loss) (114,280) (103,040) (90,611)
Retained earnings 781,801 1,221,200 1,396,418
----------- --------- -----------
Total common shareholders' equity 1,702,553 2,112,796 2,295,141
----------- --------- -----------
$ 3,498,858 $ 4,103,016 $ 4,333,968
=========== ========= ===========
* Reclassified to conform with 2002 presentation in accordance with FASB
Statement No. 144.
See notes to consolidated financial statements.
4
VF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
NINE MONTHS ENDED
-----------------
SEPTEMBER 28 SEPTEMBER 29
2002 2001 *
---- ------
OPERATIONS
Net income (loss) $(231,143) $ 250,427
Adjustments to reconcile net income (loss)
to cash provided by operating activities
of continuing operations:
Discontinued operations (2,020) (481)
Cumulative effect of change in accounting policy 527,254 --
Restructuring costs 6,227 (5,620)
Depreciation 80,586 92,416
Amortization of goodwill -- 25,558
Other, net (2,918) (23,009)
Changes in current assets and liabilities:
Accounts receivable (155,847) (61,886)
Inventories (12,142) 22,043
Accounts payable 29,735 (73,003)
Other, net 147,790 93,578
--------- ---------
Cash provided by operating activities of
continuing operations 387,522 320,023
INVESTMENTS
Capital expenditures (33,774) (57,166)
Business acquisitions (1,342) (3,557)
Other, net (3,463) 21,345
--------- ---------
Cash used by investing activities of
continuing operations (38,579) (39,378)
FINANCING
Decrease in short-term borrowings (19,241) (26,011)
Payment of long-term debt (301,326) (108,095)
Purchase of Common Stock (124,623) (109,497)
Cash dividends paid (80,961) (79,545)
Proceeds from issuance of Common Stock 36,747 37,707
Other, net (8,021) 3,991
--------- ---------
Cash used by financing activities of
continuing operations (497,425) (281,450)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 66,255 15,471
EFFECT OF FOREIGN CURRENCY RATE CHANGES ON CASH 5,155 (477)
--------- ---------
NET CHANGE IN CASH AND EQUIVALENTS (77,072) 14,189
CASH AND EQUIVALENTS - BEGINNING OF YEAR 332,049 118,891
--------- ---------
CASH AND EQUIVALENTS - END OF PERIOD $ 254,977 $ 133,080
========= =========
* Reclassified to conform with 2002 presentation in accordance with FASB
Statement No. 144.
See notes to consolidated financial statements.
5
VF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. Similarly, the 2001 year-end consolidated balance
sheet was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 28, 2002 are not necessarily
indicative of results that may be expected for the year ending January 4, 2003.
For further information, refer to the consolidated financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
December 29, 2001.
Certain amounts in the consolidated financial statements as of December 29, 2001
and September 29, 2001 have been reclassified to conform to the current period's
presentation.
NOTE B - DISCONTINUED OPERATIONS
During the fourth quarter of 2001, as part of the Strategic Repositioning
Program, management announced decisions to exit the Private Label knitwear and
Jantzen swimwear businesses. During that quarter, the Company recorded a pretax
charge for disposition of these businesses of $107.5 million ($.71 per share,
with all per share amounts presented on a diluted basis), of which $33.5 million
related to the write-off of intangible assets.
Liquidation of the Private Label knitwear business began in late 2001 and was
substantially completed during the third quarter of 2002. In March 2002, the
Company sold its Jantzen swimwear business to Perry Ellis International, Inc.
for a total consideration of $24.0 million, resulting in a gain of $1.4 million.
The Company retained the 2002 season inventories, other working capital and real
estate. Liquidation of the remaining Jantzen working capital was substantially
completed during the third quarter.
Effective at the end of the third quarter of 2002, both the Jantzen and the
Private Label knitwear businesses are accounted for as discontinued operations
in accordance with FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Accordingly, the results of operations, assets,
liabilities and cash flows of these discontinued operations have been
reclassified in the accompanying financial statements for all periods presented.
6
Summarized operating results for the discontinued operations are as follows:
Third Quarter Nine Months
------------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $3,985 $70,537 $97,981 $236,762
====== ======= ======= ========
Income (loss) before income taxes $ (604) $ 1,075 $ 2,915 $ 2,221
Income taxes (289) 724 895 1,740
------ ------- ------- --------
Income (loss) $ (315) $ 351 $ 2,020 $ 481
====== ======= ======= ========
Earnings per common share
Basic $ -- $ -- $ 0.02 $ --
Diluted -- -- 0.02 --
Summarized assets and liabilities of the discontinued operations presented in
the Consolidated Balance Sheets are as follows:
September 28 December 29 September 29
2002 2001 2001
---- ---- ----
Accounts receivable, net $ 3,318 $ 30,322 $36,355
Inventories -- 46,489 55,227
Other current assets, primarily deferred income taxes 4,025 28,800 3,210
------- -------- -------
Current assets of discontinued operations $ 7,343 $105,611 $94,792
======= ======== =======
Property, plant and equipment, net $ 4,160 $ 12,355 $35,085
Goodwill -- 17,737 51,882
Other assets, primarily deferred income taxes 18 5,209 4,789
------- -------- -------
Noncurrent assets of discontinued operations $ 4,178 $ 35,301 $91,756
======= ======== =======
Accounts payable $ 135 $ 11,296 $22,360
Accrued liabilities 15,911 43,342 13,263
------- -------- -------
Current liabilities of discontinued operations $16,046 $ 54,638 $35,623
======= ======== =======
7
NOTE C - ACQUISITIONS
The Company accrued various restructuring charges in connection with the
businesses acquired in 1999 and 2000. These charges relate to severance, closure
of manufacturing and distribution facilities, and lease and contract termination
costs. Substantially all cash payments related to these actions will be
completed during 2002. Activity in the accrual accounts is summarized as follows
(in thousands):
Facilities Lease and
Exit Contract
Severance Costs Termination Total
--------- ----- ----------- -----
Balance December 29, 2001 $ 2,178 $ 105 $ 7,677 $ 9,960
Purchase price adjustments (125) -- (150) (275)
Cash payments (1,023) (105) (6,026) (7,154)
------- ----- ------- -------
Balance September 28, 2002 $ 1,030 $ -- $ 1,501 $ 2,531
======= ===== ======= =======
NOTE D - RESTRUCTURING ACCRUALS
Activity in the restructuring accruals related to the 2001/2002 Strategic
Repositioning Program is summarized for continuing operations as follows (in
thousands):
Facilities Lease and
Exit Contract
Severance Costs Termination Total
--------- ----- ----------- -----
Balance December 29, 2001 * $ 52,480 $ 3,419 $ 9,432 $ 65,331
Accrual for 2002 actions 1,676 12,064 -- 13,740
Noncash charges -- (12,064) -- (12,064)
Cash payments (32,816) (2,710) (3,201) (38,727)
Reduction of accrual (3,398) (136) (898) (4,432)
-------- -------- ------- --------
Balance September 28, 2002 $ 17,942 $ 573 $ 5,333 $ 23,848
======== ======== ======= ========
* Reclassified to conform with 2002 presentation.
These actions affected approximately 10,600 of the Company's employees. As of
September 28, 2002, 10,200 employees have been terminated.
Activity in the 2000 restructuring accrual is summarized for continuing
operations as follows (in thousands):
8
Facilities Lease and
Exit Contract
Severance Costs Termination Total
--------- ----- ----------- -----
Balance December 29, 2001* $ 1,317 $ 499 $ 6,864 $ 8,680
Cash payments (1,170) (435) (1,933) (3,538)
Reduction of accrual -- -- (538) (538)
------- ----- ------- -------
Balance September 28, 2002 $ 147 $ 64 $ 4,393 $ 4,604
======= ===== ======= =======
* Reclassified to conform with 2002 presentation.
The Company's restructuring actions are proceeding as planned. Management
determined that a total of $5.0 million of the 2000 and 2001 accrued
restructuring liabilities was no longer required due to reduced severance
(because employees worked longer than originally planned during the 60 day
notice periods required by the Worker Adjustment Retraining Notification Act of
1988) and other cost savings. In addition, management determined that $2.5
million of restructuring-related inventory and other asset charges were no
longer required. Accordingly, these reversals of accruals were credited to
income during 2002. We believe that the remaining accruals are adequate to cover
the remaining costs. The remaining severance and other cash payments will be
made through 2003.
NOTE E - BUSINESS SEGMENT INFORMATION
Outdoor Apparel and Equipment was separately reported as a segment for the first
time at the end of 2001; accordingly, prior year information has been restated.
Financial information for the Company's reportable segments for continuing
operations is as follows (in thousands):
9
Third Quarter Nine Months
------------- -----------
2002 2001 * 2002 2001 *
---- ------ ---- ------
Net sales:
Consumer Apparel $ 1,011,055 $ 1,029,991 $ 2,844,872 $ 3,012,167
Occupational Apparel 116,293 115,575 352,814 409,311
Outdoor Apparel and Equipment 184,430 178,855 379,359 382,983
All Other 88,611 82,238 195,862 182,230
----------- ----------- ----------- -----------
Consolidated net sales $ 1,400,389 $ 1,406,659 $ 3,772,907 $ 3,986,691
=========== =========== =========== ===========
Segment profit:
Consumer Apparel $ 178,643 $ 155,499 $ 460,596 $ 451,145
Occupational Apparel 18,088 5,003 47,054 29,647
Outdoor Apparel and Equipment 40,189 37,761 54,899 49,634
All Other 11,473 14,641 24,399 22,674
----------- ----------- ----------- -----------
Total segment profit 248,393 212,904 586,948 553,100
Interest, net (19,980) (21,704) (52,094) (67,321)
Amortization of goodwill -- (8,194) -- (25,558)
Restructuring charges, net (2,216) 5,429 (6,227) 5,620
Corporate and other expenses (29,166) (20,416) (72,984) (64,138)
----------- ----------- ----------- -----------
Income from continuing operations before
income taxes and cumulative effect of
change in accounting policy $ 197,031 $ 168,019 $ 455,643 $ 401,703
=========== =========== =========== ===========
* Reclassified to conform with 2002 presentation.
Restructuring charges for continuing operations, net of reversals, relate to the
following segments (in thousands):
Third Quarter Nine Months
------------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Consumer Apparel $(2,266) $ 5,426 $(3,648) $ 5,426
Occupational Apparel (740) -- (3,856) --
Outdoor Apparel and Equipment 27 -- 514 --
All Other -- -- -- --
Corporate 763 3 763 194
------- ------- ------- -------
Total $(2,216) $ 5,429 $(6,227) $ 5,620
======= ======= ======= =======
10
NOTE F - CAPITAL
Common shares outstanding are net of shares held in treasury, and in substance
retired, of 32,143,643 at September 28, 2002, 29,141,452 at December 29, 2001
and 28,143,352 at September 29, 2001. In addition, 258,365 shares of VF Common
Stock at September 28, 2002, 266,203 shares at December 29, 2001 and 300,753
shares at September 29, 2001 are held in trust for deferred compensation plans.
These shares are treated for financial accounting purposes as treasury stock at
each of the respective dates.
There are 25,000,000 authorized shares of Preferred Stock, $1 par value. Of
these shares, 2,000,000 were designated as Series A, of which none have been
issued, and 2,105,263 shares were designated and issued as 6.75% Series B
Convertible Preferred Stock, of which 1,311,354 shares were outstanding at
September 28, 2002, 1,477,930 at December 29, 2001 and 1,500,881 at September
29, 2001.
NOTE G - COMPREHENSIVE INCOME (LOSS)
Comprehensive income consists of net income, plus certain changes in assets and
liabilities that are not included in net income but are instead reported within
a separate component of shareholders' equity under generally accepted accounting
principles. The Company's comprehensive income (loss) was as follows (in
thousands):
Third Quarter Nine Months
------------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ 128,249 $ 103,560 $(231,143) $ 250,427
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income taxes (6,105) (2,506) (1,687) (4,081)
Unrealized gains (losses) on marketable
securities, net of income taxes (1,113) (925) (440) (602)
Derivative hedging contracts,
net of income taxes 1,809 1,109 (9,113) 1,947
--------- --------- --------- ---------
Comprehensive income (loss) $ 122,840 $ 101,238 $(242,383) $ 247,691
========= ========= ========= =========
We monitor net foreign currency market exposures and may in the ordinary course
of business enter into foreign exchange forward contracts to hedge specific
foreign currency transactions or anticipated cash flows relating to changes in
exchange rates. Use of these financial instruments allows us to reduce the
Company's overall exposure to exchange rate movements, since gains and losses on
these contracts will offset the losses and gains on the transactions being
hedged. The Company's hedging practice has resulted in net realized and
unrealized hedging losses that are deferred in Other Comprehensive Income until
the underlying transactions are realized. Accordingly, there is an offsetting
hedging liability recorded in Accrued Liabilities.
11
Accumulated other comprehensive income (loss) for 2002 is summarized as follows
(in thousands):
Foreign Minimum
Currency Marketable Hedging Pension
Translation Securities Contracts Liability Total
----------- ---------- --------- --------- -----
Balance December 29, 2001 $(106,169) $ 590 $ 4,192 $(1,653) $(103,040)
Other comprehensive income (loss) (1,687) (440) (9,113) -- (11,240)
--------- ----- ------- ------- ---------
Balance September 28, 2002 $(107,856) $ 150 $(4,921) $(1,653) $(114,280)
========= ===== ======= ======= =========
NOTE H - EARNINGS PER SHARE
Earnings per share from continuing operations, based on income before the
cumulative effect of a change in accounting policy, are computed as follows (in
thousands, except per share amounts):
Third Quarter Nine Months
------------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings per share:
Income from continuing operations
before cumulative effect of
change in accounting policy $128,564 $103,209 $294,091 $249,946
Less Preferred Stock dividends and
redemption premium 1,740 1,240 7,819 4,199
-------- -------- -------- --------
Income available for Common Stock $126,824 $101,969 $286,272 $245,747
======== ======== ======== ========
Weighted average Common
Stock outstanding 108,767 111,309 109,450 111,611
======== ======== ======== ========
Basic earnings per share
from continuing operations $ 1.16 $ 0.92 $ 2.61 $ 2.21
======== ======== ======== ========
12
Third Quarter Nine Months
------------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Diluted earnings per share:
Income from continuing operations
before cumulative effect of
change in accounting policy $128,564 $103,209 $294,091 $249,946
Increased ESOP expense if Preferred Stock
were converted to Common Stock 168 213 512 638
-------- -------- -------- --------
Income available for Common Stock
and dilutive securities $128,396 $102,996 $293,579 $249,308
======== ======== ======== ========
Weighted average Common Stock outstanding 108,767 111,309 109,450 111,611
Additional Common Stock resulting from
dilutive securities:
Preferred Stock 2,098 2,402 2,167 2,434
Stock options and other 984 852 1,120 1,099
-------- -------- -------- --------
Weighted average Common Stock and
dilutive securities outstanding 111,849 114,563 112,737 115,144
======== ======== ======== ========
Diluted earnings per share
from continuing operations $ 1.15 $ 0.90 $ 2.60 $ 2.17
======== ======== ======== ========
Outstanding options to purchase 5.6 million shares of Common Stock have been
excluded from the computation of diluted earnings per share for both the third
quarter and the nine months of 2002, because the option exercise prices were
greater than the average market price of the Common Stock. Similarly, options to
purchase 6.8 million shares and 5.4 million shares of Common Stock were excluded
for the third quarter and nine months of 2001, respectively.
NOTE I - NEW ACCOUNTING POLICIES
Effective at the beginning of the first quarter of 2002, the Company adopted
Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and
Other Intangible Assets. Under this Statement, goodwill and intangible assets
with indefinite useful lives will not be amortized but must be tested at least
annually at the individual reporting unit level to determine if a write-down in
value is required. Other intangible assets will be amortized over their
estimated useful lives. The new Statement also requires an initial test for
write-down of existing goodwill and intangible assets to determine if the
existing carrying value exceeds its fair value.
In adopting the Statement, the Company estimated the fair value of its
individual business reporting units on a discounted cash flow basis. Where there
was an indication that the recorded amount of goodwill might be greater than its
fair value, the Company engaged an independent valuation firm to review those
business units and determine the amount of the possible write-down in value.
This evaluation indicated that recorded goodwill related to several business
units exceeded its fair value, resulting from acquisitions where performance had
not met management's original expectations. The fair values of the net tangible
and intangible assets of these business units, and the related goodwill
write-downs, have been measured in accordance with the requirements of FASB
Statement No. 142. The amount of write-down, and the business units leading to
the charges, are summarized by reportable segment as follows:
13
- - Consumer Apparel segment - $232.1 million: European intimate apparel,
childrenswear and Latin American jeanswear businesses.
- - Occupational Apparel segment - $109.5 million.
- - All Other segment - $185.6 million: Licensed knitwear business.
Accordingly, the Company recorded a noncash charge of $527.3 million ($4.82 per
share), which is recognized as the cumulative effect of a change in accounting
policy in the Consolidated Statement of Income at the beginning of 2002. There
was no income tax effect for this charge.
Activity in the goodwill accounts for continuing operations during 2002 is
summarized by business segment as follows (in thousands):
Outdoor
Consumer Occupational Apparel and All
Apparel Apparel Equipment Other Total
------- ------- --------- ----- -----
Balance December 29, 2001 * $ 536,636 $ 139,654 $ 110,036 $ 211,720 $ 998,046
Change in accounting policy (232,126) (109,543) -- (185,585) (527,254)
Purchase price adjustments (275) -- -- -- (275)
Currency translation 3,885 -- 98 -- 3,983
--------- --------- --------- --------- ---------
Balance September 28, 2002 $ 308,120 $ 30,111 $ 110,134 $ 26,135 $ 474,500
========= ========= ========= ========= =========
* Reclassified to conform with 2002 presentation.
Also under the new Statement, goodwill amortization, which totaled $33.2 million
($.30 per share) for fiscal year 2001, is no longer required. The following
presents adjusted income and earnings per share from continuing operations as if
goodwill had not been required to be amortized in the prior year periods (in
thousands, except per share amounts):
14
Third Quarter Nine Months
2001 * 2001 *
------ ------
Income from continuing operations $103,209 $249,946
Add back goodwill amortization,
net of income taxes 8,020 25,036
-------- --------
Adjusted income from continuing operations $111,229 $274,982
======== ========
Basic earnings per share from continuing operations:
Reported net income $ 0.92 $ 2.21
Add back goodwill amortization 0.07 0.23
-------- --------
Adjusted basic earnings per share
from continuing operations $ 0.99 $ 2.44
======== ========
Diluted earnings per share from continuing operations:
Reported net income $ 0.90 $ 2.17
Add back goodwill amortization 0.07 0.23
-------- --------
Adjusted diluted earnings per share
from continuing operations $ 0.97 $ 2.40
======== ========
* Reclassified to conform with 2002 presentation.
The Company adopted FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, at the beginning of 2002. This Statement
establishes accounting standards for the recognition and measurement of
long-lived assets held for use or held for disposal. Also under this Statement,
the historical operating results of the Private Label knitwear and the Jantzen
swimwear business units have been reclassified as discontinued operations
following liquidation of those businesses at the end of the third quarter of
2002.
The Company adopted FASB Statement No. 145 at the beginning of the second
quarter of 2002. This Statement amends or rescinds several authoritative
pronouncements, including those covering gains and losses from extinguishment of
debt.
In April 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit and Disposal Activities. This Statement is effective for
exit or disposal activities that are initiated after December 31, 2002. Under
this Statement, a cost related to an exit or disposal activity is recognized
when the liability is incurred, instead of when management commits to an exit
plan as stated under the previous accounting principles. The Company will adopt
this Statement at the beginning of 2003.
15
NOTE J - SUBSEQUENT EVENT
Subsequent to the end of the third quarter, the Board of Directors declared an
increase in the quarterly cash dividend rate of $.01 to $.25 per share, payable
on December 20, 2002 to shareholders of record as of the close of business on
December 10, 2002.
16
Supplemental Schedule 1
VF CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR 2002, BY QUARTER
(in thousands, except per share amounts)
FIRST SECOND THIRD NINE
QUARTER * QUARTER * QUARTER MONTHS
--------- --------- ------- ------
NET SALES $ 1,212,262 $ 1,160,256 $ 1,400,389 $ 3,772,907
COSTS AND OPERATING EXPENSES
Cost of products sold 784,368 725,076 871,117 2,380,561
Marketing, administrative and general
expenses 295,117 288,578 321,027 904,722
Other operating (income) expense, net (4,497) (5,324) (8,070) (17,891)
----------- ----------- ----------- -----------
1,074,988 1,008,330 1,184,074 3,267,392
----------- ----------- ----------- -----------
OPERATING INCOME 137,274 151,926 216,315 505,515
OTHER INCOME (EXPENSE)
Interest, net (17,387) (14,727) (19,980) (52,094)
Miscellaneous, net 1,134 392 696 2,222
----------- ----------- ----------- -----------
(16,253) (14,335) (19,284) (49,872)
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING POLICY 121,021 137,591 197,031 455,643
INCOME TAXES 43,974 49,111 68,467 161,552
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY 77,047 88,480 128,564 294,091
DISCONTINUED OPERATIONS, NET OF INCOME TAXES 1,949 386 (315) 2,020
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
POLICY FOR GOODWILL (527,254) -- -- (527,254)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (448,258) $ 88,866 $ 128,249 $ (231,143)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC
Income from continuing operations $ 0.67 $ 0.79 $ 1.16 $ 2.61
Discontinued operations, net of income
taxes 0.02 -- -- 0.02
Cumulative effect of change in
accounting policy (4.80) -- -- (4.82)
----------- ----------- ----------- -----------
Net income (loss) $ (4.11) $ 0.79 $ 1.16 $ (2.19)
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Income from continuing operations $ 0.67 $ 0.79 $ 1.15 $ 2.60
Discontinued operations, net of income
taxes 0.02 -- -- 0.02
Cumulative effect of change in
accounting policy (4.80) -- -- (4.82)
----------- ----------- ----------- -----------
Net income (loss) $ (4.11) $ 0.79 $ 1.15 $ (2.20)
=========== =========== =========== ===========
* Reclassified to present the Private Label knitwear and the Jantzen
swimwear businesses as discontinued operations.
Note: Discontinued operations includes a pretax gain on sale of business of $1.4
million ($.01 per share) in the first quarter.
17
Supplemental Schedule 2
VF CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR 2001, BY QUARTER
(In thousands, except per share amounts)
FOURTH
FIRST SECOND THIRD QUARTER *
QUARTER * QUARTER* QUARTER* (SEE NOTE) FULL YEAR *
----------- ----------- ----------- ----------- ------------
NET SALES $ 1,340,388 $ 1,239,644 $ 1,406,659 $ 1,233,726 $ 5,220,417
COSTS AND OPERATING EXPENSES
Cost of products sold 880,485 807,584 913,641 902,523 3,504,233
Marketing, administrative and general expenses 312,446 290,731 301,159 347,004 1,251,340
Other operating expense, net 3,822 4,011 2,302 4,622 14,757
----------- ----------- ----------- ----------- ------------
1,196,753 1,102,326 1,217,102 1,254,149 4,770,330
----------- ----------- ----------- ----------- ------------
OPERATING INCOME (LOSS) 143,635 137,318 189,557 (20,423) 450,087
OTHER INCOME (EXPENSE)
Interest, net (22,921) (22,696) (21,704) (19,236) (86,557)
Miscellaneous, net (718) (933) 166 3,000 1,515
----------- ----------- ----------- ----------- ------------
(23,639) (23,629) (21,538) (16,236) (85,042)
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 119,996 113,689 168,019 (36,659) 365,045
INCOME TAXES 44,388 42,560 64,810 (1,339) 150,419
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 75,608 71,129 103,209 (35,320) 214,626
DISCONTINUED OPERATIONS, NET OF INCOME TAXES 1,878 (1,748) 351 (77,277) (76,796)
----------- ----------- ----------- ----------- ------------
NET INCOME (LOSS) $ 77,486 $ 69,381 $ 103,560 $ (112,597) $ 137,830
=========== =========== ============ =========== ============
EARNINGS (LOSS) PER COMMON SHARE - BASIC
Income (loss) from continuing operations $ 0.66 $ 0.63 $ 0.92 $ (0.33) $ 1.89
Discontinued operations, net of income taxes 0.02 (0.02) -- (0.70) (0.70)
----------- ----------- ----------- ----------- ------------
Net income (loss) $ 0.68 $ 0.61 $ 0.92 $ (1.03) $ 1.19
=========== =========== ============ =========== ============
EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Income (loss) from continuing operations $ 0.65 $ 0.62 $ 0.90 $ (0.33) $ 1.89
Discontinued operations, net of income taxes 0.02 (0.02) -- (0.70) (0.70)
----------- ----------- ----------- ----------- ------------
Net income (loss) $ 0.67 $ 0.60 $ 0.90 $ (1.03) $ 1.19
=========== =========== ============ =========== ============
* Reclassified to present the Private Label knitwear and the Jantzen
swimwear businesses as discontinued operations.
Note: The fourth quarter of 2001 included restructuring charges of $129.3
million ($.82 per share) for continuing operations. In addition, the
fourth quarter included a $107.5 million charge ($.71 per share) to write
down the businesses to be discontinued to net realizable value.
18
Supplemental Schedule 3
VF CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
BUSINESS SEGMENT INFORMATION
YEAR 2002, BY QUARTER
(In thousands)
FIRST SECOND THIRD NINE
QUARTER* QUARTER* QUARTER MONTHS
NET SALES:
Consumer Apparel $ 953,097 $ 880,720 $ 1,011,055 $ 2,844,872
Occupational Apparel 120,716 115,805 116,293 352,814
Outdoor Apparel and Equipment 87,609 107,320 184,430 379,359
All Other 50,840 56,411 88,611 195,862
----------- ----------- ----------- -----------
Consolidated net sales $ 1,212,262 $ 1,160,256 $ 1,400,389 $ 3,772,907
=========== =========== =========== ===========
SEGMENT PROFIT:
Consumer Apparel $ 140,542 $ 141,411 $ 178,643 $ 460,596
Occupational Apparel 13,822 15,144 18,088 47,054
Outdoor Apparel and Equipment 4,715 9,995 40,189 54,899
All Other 7,532 5,394 11,473 24,399
----------- ----------- ----------- -----------
Total segment profit 166,611 171,944 248,393 586,948
Interest, net (17,387) (14,727) (19,980) (52,094)
Restructuring charges, net (7,176) 3,165 (2,216) (6,227)
Corporate and other expenses (21,027) (22,791) (29,166) (72,984)
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes and cumulative
effect of change in accounting policy $ 121,021 $ 137,591 $ 197,031 $ 455,643
=========== =========== =========== ===========
RESTRUCTURING CHARGES, NET OF REVERSALS:
Consumer Apparel $ (3,710) $ 2,328 $ (2,266) $ (3,648)
Occupational Apparel (3,432) 316 (740) (3,856)
Outdoor Apparel and Equipment (34) 521 27 514
All Other -- -- -- --
Corporate and other expenses -- -- 763 763
----------- ----------- ----------- -----------
Total $ (7,176) $ 3,165 $ (2,216) $ (6,227)
=========== =========== =========== ===========
* Reclassified to exclude the discontinued Private Label knitwear and the
Jantzen swimwear businesses.
19
Supplemental Schedule 4
VF CORPORATION
SUPPLEMENTAL FINANCIAL INFORMATION
BUSINESS SEGMENT INFORMATION
YEAR 2001, BY QUARTER
(In thousands)
FIRST SECOND THIRD FOURTH
QUARTER* QUARTER* QUARTER* QUARTER* FULL YEAR*
NET SALES:
Consumer Apparel $ 1,041,605 $ 940,571 $ 1,029,991 $ 926,115 $ 3,938,282
Occupational Apparel 158,417 135,319 115,575 126,686 535,997
Outdoor Apparel and Equipment 88,236 115,892 178,855 109,631 492,614
All Other 52,130 47,862 82,238 71,294 253,524
----------- ----------- ----------- ----------- -----------
Consolidated net sales $ 1,340,388 $ 1,239,644 $ 1,406,659 $ 1,233,726 $ 5,220,417
=========== =========== =========== =========== ===========
SEGMENT PROFIT:
Consumer Apparel $ 155,751 $ 139,895 $ 155,499 $ 104,662 $ 555,807
Occupational Apparel 13,863 10,781 5,003 5,978 35,625
Outdoor Apparel and Equipment 561 11,312 37,761 11,662 61,296
All Other 3,078 4,955 14,641 6,983 29,657
----------- ----------- ----------- ----------- -----------
Total segment profit 173,253 166,943 212,904 129,285 682,385
Interest, net (22,921) (22,696) (21,704) (19,236) (86,557)
Amortization of intangible assets (8,701) (8,663) (8,194) (8,292) (33,850)
Restructuring charges, net -- 191 5,429 (124,378) (118,758)
Corporate and other expenses (21,636) (22,086) (20,416) (14,038) (78,176)
----------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes $ 119,995 $ 113,689 $ 168,019 $ (36,659) $ 365,044
=========== =========== =========== =========== ===========
RESTRUCTURING CHARGES, NET OF REVERSALS:
Consumer Apparel $ -- $ -- $ 5,426 $ (74,853) $ (69,427)
Occupational Apparel -- -- -- (23,170) (23,170)
Outdoor Apparel and Equipment -- -- -- (3,725) (3,725)
All Other -- -- -- -- --
Corporate and other expenses -- 191 3 (22,630) (22,436)
----------- ----------- ----------- ----------- -----------
Total $ -- $ 191 $ 5,429 $ (124,378) $ (118,758)
=========== =========== =========== =========== ===========
* Reclassified to exclude the discontinued Private Label knitwear and the
Jantzen swimwear businesses.
20
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
DISCONTINUED OPERATIONS
During the fourth quarter of 2001, as part of the Strategic Repositioning
Program discussed in the following section, management announced decisions to
exit the Private Label knitwear and Jantzen swimwear businesses. During that
quarter, the Company recorded a pretax charge for disposition of these business
of $107.5 million, ($.71 per share, with all per share amounts presented on a
diluted basis), of which $33.5 million related to write-off of intangible
assets.
Liquidation of the Private Label knitwear business began in late 2001 and was
substantially completed during the third quarter of 2002. The Jantzen swimwear
business was sold to Perry Ellis International, Inc. in March 2002 for a total
consideration of $24.0 million, with the Company retaining the 2002 season
inventories, other working capital and real estate. Liquidation of the remaining
Jantzen working capital was substantially completed during the third quarter.
Accordingly, the operating results and assets and liabilities of these
businesses have been separately presented as discontinued operations in the
consolidated financial statements, and amounts for prior periods have similarly
been reclassified.
At the time the decisions to exit the two businesses were made, we estimated
that the costs and operating losses to be incurred in 2002 during the phaseout
of those businesses would be $15 million. During the third quarter, the net
impact on reported results related to these businesses was a net loss of $.3
million or less than $.01 per share. Year-to-date, these businesses contributed
net income of $2.0 million or $.02 per share, including the $1.4 million pretax
gain on the sale of Jantzen in March 2002. Operating results for the two
discontinued businesses during 2002 were better than expected due to favorable
consumer response to the 2002 Jantzen swimwear line and expense control during
the liquidation period. We expect a small operating loss related to these
discontinued businesses during the fourth quarter, resulting in net earnings of
approximately $.01 per share for the year.
See Note B to the consolidated financial statements for further details about
the discontinued operations, and see Supplemental Schedules 1 and 2 for
reclassified income statements by quarter for 2002 and 2001. Unless otherwise
stated, the remaining sections of the Management's Discussion and Analysis of
Financial Condition and Results of Operations relate to continuing operations.
DISCUSSION AND ANALYSIS OF RESULTS OF CONTINUING OPERATIONS
STRATEGIC REPOSITIONING PROGRAM
During the fourth quarter of 2001, we initiated a Strategic Repositioning
Program. This consisted of a series of actions to aggressively reduce the
Company's overall cost structure by closing higher cost manufacturing plants,
consolidating distribution centers and reducing administrative functions. (This
Program also covered the exit of the two businesses now being accounted for as
discontinued operations, as discussed in the preceding section. Amounts
discussed herein relate to continuing operations.) The total cost of the
approved actions was estimated at $158 million. The Company recorded pretax
charges of $129.3 million ($.82 per share) in the fourth quarter of 2001, with
the balance of the charges estimated at approximately $30 million to be recorded
in 2002. During the third quarter and nine months of 2002, the Company recorded
$3.4 million ($.02 per share) and $13.7 million ($.08 per share), respectively,
of restructuring charges related to these actions. Partially offsetting these
amounts, we reversed certain previously recorded restructuring charges due to
severance accrual revisions and the lowering of other expected future closing
costs, and we have recognized gains on sales of closed facilities. A summary of
restructuring charges incurred, as well as reversals of restructuring charges
and gains on sales of closed facilities, is presented in the table in the next
section.
21
Accordingly, net restructuring costs related to the Strategic Repositioning
Program totaled only $3.6 million through the first nine months of 2002, or a
$.02 per share impact on income from continuing operations.
The Company continues to achieve better than expected results from its Strategic
Repositioning Program, as evidenced by improvements in profitability during the
current quarter and the nine months of 2002. Originally, we estimated benefits
of these actions would result in total cost reductions of $100 million in 2002,
with an additional $30 million of savings to be achieved in 2003. The plans and
objectives of this Program remain intact, as we are continuing to aggressively
reduce product costs in the fourth quarter by moving more manufacturing
offshore. This will involve additional domestic plant closures, some of which
were not contemplated in the original Program. We continue to anticipate that
total costs in 2002 related to the Strategic Repositioning Program will impact
earnings by approximately $.20 per share, which implies a charge of
approximately $.18 per share in the fourth quarter.
We expect cash expenses under the Strategic Repositioning Program, including the
exit of the two businesses accounted for as discontinued operations, will
approximate $120 million. We also expect that asset sales and liquidation of
working capital in the two discontinued businesses will generate more than $80
million of cash proceeds, leaving a net cash outflow of less than $40 million
related to the Program. Through September 2002, cash payments related to the
Program totaled $72 million and cash proceeds of $72 million have been received.
Future payments required in connection with these restructuring charges are not
expected to have a significant effect on the Company's liquidity.
See Note D to the consolidated financial statements for additional information
on restructuring charges.
CONSOLIDATED STATEMENTS OF INCOME
For the third quarter of 2002, VF reported consolidated income from continuing
operations of $128.6 million, equal to $1.15 per share, compared with $103.2
million or $.90 per share in the 2001 period. Income from continuing operations
increased 25%, while earnings per share increased 28%, reflecting the benefit of
the Company's share repurchase program. For the nine months of 2002, reported
income from continuing operations (before the effect of a change in accounting
policy for goodwill) was $294.1 million, equal to $2.60 per share, compared with
$249.9 million or $2.17 per share in 2001. For the nine months, income from
continuing operations increased 18%, while earnings per share increased 20%,
again reflecting the benefit of the share repurchase program.
Excluding the effects of actions related to the Strategic Repositioning Program,
income from continuing operations was $129.5 million, or $1.16 per share, in the
third quarter of 2002 and $296.4 million, or $2.62 per share, in the nine months
of 2002. The nonrecurring items related to the Strategic Repositioning Program
in the quarter and year-to-date periods, and the income statement lines affected
by their inclusion, are as follows (in thousands, except per share amounts):
22
Third Quarter Nine Months
------------- -----------
Pretax Pretax
Amount EPS Amount EPS
-------- ------- --------- ------
Earnings per share from continuing
operations, excluding nonrecurring items $ 1.16 $ 2.62
Nonrecurring items:
Restructuring charges $ (3,375) (0.02) $ (13,740) (0.08)
Reversal of prior years' restructuring
charges 1,159 0.01 7,513 0.04
Gains on sale of closed facilities 822 -- 2,619 0.02
------ ------
Earnings per share from continuing
operations, as reported $ 1.15 $ 2.60
====== ======
Restructuring charges:
Cost of products sold $ (1,671) $ (9,557)
Marketing, administrative and general
expenses (1,704) (4,183)
--------- --------
$ (3,375) (13,740)
========= ========
Reversal of prior years' restructuring charges:
Cost of products sold $ 61 $ 5,121
Marketing, administrative and general
expenses 1,098 2,392
--------- --------
$ 1,159 $ 7,513
========= ========
Gains on sale of closed facilities:
Costs of products sold $ 822 $ 2,619
========= ========
Sales in the third quarter were flat and in the nine months of 2002 declined by
5% compared with the prior year periods. The decline in the nine months of 2002
was due to unit volume decreases primarily in domestic business units. In
addition, for both the quarter and nine months, sales were affected by
improvements in product mix, offset by selected price reductions. Also, in
translating foreign currencies into the U.S. dollar, the weaker U.S. dollar
benefited 2002 sales comparisons by $17 million in the quarter relative to the
prior year period; for the nine months, the translation effect was a reduction
of $1 million relative to the prior year period.
Gross margin was 37.8% of sales in the quarter and 36.9% in the nine months of
2002, compared with 35.0% and 34.7%, respectively, in the 2001 periods. Gross
margin improved as the benefits of the Strategic Repositioning Program are being
realized through lower cost sourcing and improved manufacturing capacity
utilization. During the year, we have also demonstrated our ability to operate
with leaner inventories. The prior year periods included expenses related to
downtime in manufacturing plants, particularly in domestic jeanswear. There are
also lower sales of distressed product which carry lower gross margins in 2002.
In addition, gross margin in the 2002 periods includes the effects of three
nonrecurring items explained in the table above: restructuring charges, reversal
of prior years' restructuring charges and gains on the sale of closed
facilities. The net amount of these three nonrecurring items and their effect on
gross margin percentages was not significant.
Marketing, administrative and general expenses were 22.9% of sales in the
quarter and 24.0% in the nine months of 2002, compared with 21.4% and 22.7% in
the 2001 periods. Benefits of the Strategic Repositioning Program are being
realized through lower distribution and administrative expenses. Expenses as a
percent of
23
sales increased due to higher accruals for incentive compensation associated
with the Company's improved financial performance in 2002 and due to higher
advertising spending. For the year-to-date, advertising spending increased by
11%, with the increase focused on the Company's Lee(R), Wrangler(R), Vanity
Fair(R), Vassarette(R) and The North Face(R) brands. In addition, 2002 includes
nonrecurring restructuring charges, net of reversal of prior periods'
restructuring charges, as explained in the table above.
Other operating income and expense includes net royalty income. In addition,
this caption in 2001 included $8.2 million of amortization of goodwill in the
quarter and $25.6 million in the nine months, which is not required in 2002
under FASB Statement No. 142, as discussed in Note I to the consolidated
financial statements.
Operating income, as reported, was 15.4% of sales in the third quarter of 2002
and 13.4% in the first nine months of 2002, compared with 13.5% and 11.8% in the
2001 periods. Excluding goodwill amortization in 2001, operating margins would
have been 14.1% in the quarter and 12.4% in the nine months of 2001. Previously,
we had stated that we expected our operating margins to increase by 200 basis
points during 2002, excluding goodwill amortization in both years. Approximately
one-fourth of this amount is attributable to elimination of the lower margin
discontinued businesses. For the full year 2002, we continue to expect that our
operating margins in our continuing businesses will increase by approximately
150 basis points over the 2001 comparable level.
Net interest expense decreased in 2002 due to lower average borrowings. Interest
expense in the third quarter included $5.0 million related to the redemption
premium and write-off of deferred issuance costs on the early repayment of the
9.25% debentures during the quarter.
The effective income tax rate (before the cumulative effect of the change in
accounting policy) was 34.7% for the quarter and 35.5% for the nine months of
2002, compared with 38.6% and 37.8%, respectively, for the 2001 periods. The
effective rate declined in 2002 due to the elimination of nondeductible goodwill
amortization expense and an expected lower effective tax rate on foreign
earnings.
The Company adopted FASB Statement No. 142 effective at the beginning of 2002.
This required change in accounting policy resulted in a nonrecurring noncash
charge of $527.3 million, without tax benefit, or $4.82 per share in the first
quarter of 2002. See Note I to the consolidated financial statements for
additional details. Including the effect of this accounting change, the net loss
as reported was $231.1 million ($2.20 per share) in the first nine months of
2002, compared with net income of $250.4 million ($2.17 per share) in the 2001
period.
INFORMATION BY BUSINESS SEGMENT
See Supplemental Schedules 3 and 4 for business segment information for
continuing operations, by quarter, for 2002 and 2001.
The Consumer Apparel segment consists of our jeanswear, women's intimate apparel
and children's apparel businesses. Overall, segment sales declined by 2% and 6%
in the 2002 third quarter and nine months, respectively, reflecting continued
slow consumer spending on apparel. Domestic jeanswear sales declined 3% in the
quarter and 6% in the nine months reflecting low levels of consumer spending on
apparel, store closures by certain major customers, selected price reductions
and pressure from lower priced private label goods in the mass channel.
Jeanswear sales in international markets increased by 9% in the quarter, with a
20% gain in Europe being offset in part by a decline in Latin America. Excluding
currency effects, jeanswear sales in international markets advanced 4%. For the
first nine months, international jeanswear sales advanced slightly (on both a
reported basis and excluding currency effects), with an increase in Europe
offset by a decline in Latin America. Domestic intimate
24
apparel sales declined 5% in the quarter and year-to-date periods due to lower
sales in the mass channel and in private label. Sales in the department store
channel, which includes the Vanity Fair, Lily of France(R) and the licensed
Tommy Hilfiger(R) brands, were flat in the quarter and increased in the nine
months. The integration of our Bestform business into our other domestic
intimate apparel business was completed during the second quarter with no
business disruptions. The children's playwear market has been difficult all
year, in part due to private label competition in the department store channel
of distribution, with both sales and operating profit down from prior year
levels. Segment profit increased 15% in the quarter, with increases across all
business units with the exception of children's playwear. The profit advance was
due largely to cost reduction benefits realized through the Strategic
Repositioning Program. Segment profit, led by international jeanswear, increased
2% in the first nine months.
The Occupational Apparel segment includes the Company's industrial, career and
safety apparel businesses. Sales advanced slightly in the quarter. New uniform
programs in the third quarter with major corporate and government customers more
than offset continuing declines in basic workwear accounts resulting from weak
industrial employment in the United States and ongoing consolidation of
industrial laundries with increased in-house manufacturing by some our
customers. Segment profit increased in both periods, representing higher margins
earned due to cost reduction efforts and the elimination of operating losses in
discontinued product lines.
The Outdoor Apparel and Equipment segment consists of the Company's
outdoor-related businesses represented by outerwear, equipment, backpacks and
daypacks. Sales increased 3% in the quarter, primarily in international markets,
and declined slightly in the nine months. First quality sales were up 12% in
both periods of 2002. The prior year had higher sales of distressed inventories
related to the acquisitions in the year 2000. Segment profit increased in both
periods due to improved profitability in most businesses in the segment and
increased sales in international businesses.
The All Other segment includes the Company's licensed sports apparel and
distributor knitwear businesses. Sales and profits advanced in licensed sports
apparel in both periods, led by sales under the new agreement with the National
Football League, but have declined in the distributor knitwear business.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OF CONTINUING OPERATIONS
BALANCE SHEETS
Accounts receivable at the end of the third quarter of 2002 are comparable to
the same period in 2001 on flat third quarter sales. Receivables are higher than
at the end of 2001 due to seasonal sales patterns. The allowance for bad debts
declined compared with the prior year-end due to the write-off of accounts
receivable related to the bankruptcy of a major retail customer in the first
quarter.
Inventories at continuing businesses have declined by $154 million from
September 2001 and by $247 million from September 2000. Looking forward, we
expect little change in inventories by the end of 2002 compared with 2001
year-end levels.
Property, plant and equipment declined over the last year due to depreciation
expense exceeding capital spending and the write-down of assets related to the
2001 restructuring actions.
Goodwill was written down effective at the beginning of 2002 due to the adoption
of FASB Statement No. 142. (See Note I to the consolidated financial statements
for details.) In addition, the balance declined over the last year from
write-downs related to disposition of businesses and amortization expense in
2001.
The increase in other accrued liabilities from the prior year relates to higher
accruals for (1) payroll (because September 2002 monthly payrolls were paid
after the balance sheet date versus before the quarter-end in 2001), (2)
25
incentive compensation due to improved financial performance in 2002, (3)
increased income tax liabilities resulting from improved operating results and
(4) restructuring charges. The increases in accounts payable and in accrued
liabilities from the end of 2001 are due to seasonal patterns.
Long-term debt has been reduced by the early redemption in February 2002 of a
total of $200.0 million of notes due in 2003 and 2004 and in September 2002 of
$100.0 million of debentures due in 2022. The early redemption of the 2022
debentures included a redemption premium and write-off of deferred debt issuance
costs of $5.0 million, which was recorded in interest expense. Short-term
borrowings have been reduced with the Company's strong cash flow from operations
over the last year. Short-term borrowings remaining at September 2002 relate to
our international businesses.
By the end of the second quarter of 2002, all of the ESOP Convertible Preferred
Stock had been allocated to participant accounts in the 401(k) savings plan.
Beginning in April 2002, Company matching contributions to the savings plan are
being made in cash instead of Preferred Stock. This change will not have a
significant effect on cash requirements.
The valuation date for the Company's defined benefit pension plans is September
30 of each year. Due to the significant decline in the global securities markets
during the past year and particularly in the last quarter, the value of our
pension plan assets has declined. At the same time, the overall level of
interest rates has declined, resulting in a lower discount rate applied to our
pension obligations; accordingly, the present value of our future benefit
obligations will increase. While our actuarial valuation is not yet complete,
because our estimated accumulated benefit obligations exceed the fair value of
our pension plan assets at September 30, 2002, we will be recording under
applicable accounting standards a minimum pension liability in our January 4,
2003 year-end balance sheet. The amount of the minimum pension liability will be
approximately $200 million, resulting in an aftertax charge directly to Other
Comprehensive Loss in Shareholders' Equity of approximately $125 million. This
noncash charge will not impact our operating results or liquidity. Any
differences between actual results and actuarial assumptions (e.g., investment
earnings and discount rate) are accumulated and amortized over future periods
and, therefore, would result in increased pension expense to be recognized in
such future periods.
We believe that retirement benefits are important for our associates, and
accordingly the Company is committed to maintaining a well-funded pension plan.
We are committed to improving the funded status of the plan through additional
Company contributions. Accordingly, any recorded minimum pension liability and
related charge to equity are expected to be reduced.
LIQUIDITY AND CASH FLOWS
The financial condition of the Company is reflected in the following:
Sept 28 December 29 Sept 29
2002 2001 2001
------- ----------- -------
(Dollars in millions)
Working capital $ 1,123.6 $ 1,217.6 $ 1,274.1
Current ratio 2.2 to 1 2.5 to 1 2.5 to 1
Debt to total capital 27.9% 31.7% 30.9%
The debt to total capital ratio was significantly affected at September 2002 by
(1) the early repayment of $300.0 million of debt during the first nine months
of the year, which lowered the ratio and (2) the cumulative effect of the
accounting change for goodwill recorded at the beginning of 2002, which
increased the ratio. Net of cash, our debt to total capital ratio at September
2002 was 19.2%.
26
The Company's primary source of liquidity is cash flow provided by operations,
which was $387.5 million in the first nine months of 2002, compared with $320.0
million in 2001. In addition, cash provided by the two businesses being
accounted for as discontinued operations totaled $66.3 million, including $39.8
million of operating cash flows and $24.0 million received from the sale of
Jantzen. Cash provided by operations in 2002, from both continuing and
discontinued businesses, is expected to be around $500 million.
In addition to cash flow from operations, VF is well positioned to finance its
ongoing operations and meet unusual circumstances that may arise. VF maintains a
$750.0 million unsecured committed bank facility that expires in July 2004. This
bank facility supports a continuing source of short-term financing, subject to
market conditions, through a $750.0 million commercial paper program. Any
issuance of commercial paper would reduce the amount available under the bank
facility. At September 28, 2002, there were no commercial paper or bank
borrowings against this facility.
In addition, under a Registration Statement filed in 1994 with the Securities
and Exchange Commission, VF has the ability to offer, on a delayed or continuous
basis, up to $300.0 million of additional debt, equity or other securities as
market opportunities present themselves.
In November 2001, Standard & Poors affirmed its `A minus' long-term corporate
credit and senior unsecured debt ratings for VF, as well as its `A-2' short-term
credit and commercial paper ratings. Their ratings outlook is "stable." In June
2002, Moody's Investors Service confirmed its ratings of `A2' for VF's senior
unsecured debt and `Prime - 1' for commercial paper based on the value of VF's
brands, its strong market share in the jeans business and the strength of its
systems which allow the Company to effectively manage inventory risks. Moody's,
however, changed the rating outlook from "stable" to "negative" based on
declines in sales volume at the domestic jeanswear business and reductions in
the level of operating profitability. There are no acceleration of maturity
clauses in existing debt agreements. Based on current conditions, management
believes that any negative rating change, if one were to occur, would not have a
material impact on VF's financial results or on the ability to issue commercial
paper.
Since the 2001 Annual Report on Form 10-K, there have been no material changes
relating to the Company's fixed obligations that require the use of funds or
other financial commitments that may require the use of funds, other than the
early redemption of $300.0 million of debt during 2002. Management believes that
VF's financial condition is strong and that its cash balances, operating cash
flows, access to equity capital markets and borrowing capacity, taken as a
whole, provide adequate liquidity to meet all of its obligations when due and
flexibility to meet investment opportunities that may arise.
Capital expenditures were lower in the first nine months of 2002. For the full
year, we expect capital spending to be somewhat less than the 2001 level.
Capital spending will be funded by cash flow from operations.
The Company purchased 1.0 million shares of its Common Stock in open market
transactions during each of the first three quarters of 2002 at a total cost of
$124.6 million. Under its current authorization from the Board of Directors, the
Company may purchase up to an additional 7.0 million shares. We intend to
continue to purchase shares, although the rate of repurchase may be adjusted
depending on acquisition opportunities that may arise.
The Company has received notice of proposed income tax deficiencies from the
Internal Revenue Service ("IRS") for examination of the Company's 1995 to 1997
tax years. Management believes the ultimate outcome of the IRS audits will not
have a material adverse impact on the Company's financial position or results of
operations.
27
OUTLOOK
Looking ahead to the remainder of 2002:
- - The retail climate remains challenging. Accordingly, we estimate that
fourth quarter sales will be about flat with the prior year's quarter.
- - As stated above, net restructuring costs related to the Strategic
Repositioning Program totaled only $3.6 million through the first nine
months of 2002, or a $.02 per share impact on income from continuing
operations. We are continuing to aggressively reduce product costs in the
fourth quarter by moving additional manufacturing offshore. This involves
additional domestic plant closures, some of which were not contemplated in
the original Program. We continue to anticipate that total costs in 2002
related to the Strategic Repositioning Program will impact earnings by
approximately $.20 per share, which implies a charge of approximately $.18
per share in the fourth quarter.
- - Excluding net costs to be incurred in the fourth quarter related to the
Strategic Repositioning Program and excluding restructuring costs incurred
in the fourth quarter of 2001, we expect earnings from continuing
operations to increase approximately 50% over prior year levels, to $.75
per share. Most of this improvement is driven by continued gross margin
expansion as we benefit from our move to lower cost manufacturing and an
overall reduction in our cost structure.
- - For the full year, we expect earnings per share of $3.35 from continuing
operations, representing an increase of about 25% from the $2.66 earned in
2001. Again, these amounts exclude the previously mentioned restructuring
costs in both 2002 and 2001 and the write-down of goodwill under the new
accounting rules.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, we may make oral or written statements, including statements
in this Quarterly Report, that constitute "forward-looking statements" within
the meaning of the federal securities laws. This includes statements concerning
plans, objectives, projections and expectations relating to the Company's
operations or economic performance, and assumptions related thereto.
Forward-looking statements are made based on our expectations and beliefs
concerning future events impacting the Company and therefore involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements.
Important factors that could cause the actual results of operations or financial
condition of the Company to differ include, but are not necessarily limited to,
the overall level of consumer spending for apparel; changes in trends in the
segments of the market in which the Company competes; competitive conditions in
and financial strength of our suppliers and of our retail customers; actions of
competitors, customers, suppliers and service providers that may impact the
Company's business; completion of software developed by outside vendors and the
related implementation of the Company's common systems project; the ability to
execute our restructuring initiatives and to achieve the anticipated cost
savings; the availability of new acquisitions that increase shareholder value
and our ability to integrate new acquisitions successfully; labor actions that
could disrupt the flow of goods through U.S. ports; and the impact of economic
changes in the markets where the Company competes, such as changes in interest
rates, currency exchange rates, inflation rates, recession, and other external
economic and political factors over which we have no control.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in the Company's market risk exposures
from what was disclosed in Item 7A of the Company's Annual Report on Form 10-K
for the year ended December 29, 2001.
28
Item 4 - Controls and Procedures
(a) Evaluation of disclosure controls and procedures: The term "disclosure
controls and procedures" is defined in the Securities Exchange Act of
1934. These rules refer to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files with the Securities and Exchange
Commission (SEC) is recorded, processed, summarized and reported within
required time periods.
We have had controls and procedures in place for many years for the
gathering and reporting of business, financial and other information in
our SEC filings. To centralize and formalize this process, during the
third quarter we formed an Enterprise Risk Management and Disclosure
Committee comprised of various members of management and chaired by
our Chief Financial Officer. At the direction of our Chief Executive
Officer and Chief Financial Officer, this Committee has evaluated
the effectiveness of the disclosure controls and procedures at VF and
its subsidiaries as of a date within 90 days before the filing of this
quarterly report. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded as of the evaluation date
that such controls and procedures were operating effectively to ensure
the clarity and material completeness of disclosures related to VF and
its subsidiaries in its periodic reports filed with the SEC. Further, they
have concluded that there are no significant deficiencies in the design
or operation of internal controls that could significantly affect our
ability to record, process, summarize or report financial data.
(b) Changes in internal controls:
Subsequent to the evaluation date referred to above, there have been no
significant changes in internal controls or in other factors that could
significantly affect those controls.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 - Certification of the principal executive officer, Mackey J.
McDonald, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification of the principal financial officer, Robert K.
Shearer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
A report on Form 8-K dated August 8, 2002 contained statements under oath
of the principal executive officer of VF Corporation, Mackey J. McDonald,
and of the principal financial officer of VF Corporation, Robert K.
Shearer, regarding facts and circumstances relating to exchange act
filings pursuant to Securities and Exchange Commission Order No. 4-460.
A report on Form 8-K dated July 17, 2002 announced the appointment of
Raymond G. Viault, Vice Chairman of General Mills, Inc., to the VF Board
of Directors.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
V.F. CORPORATION
----------------
(Registrant)
By: /s/ Robert K. Shearer
------------------------
Robert K. Shearer
Vice President - Finance
(Chief Financial Officer)
Date: November 8, 2002
By: /s/ Robert A. Cordaro
-----------------------
Robert A. Cordaro
Vice President - Controller
(Chief Accounting Officer)
30
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mackey J. McDonald, certify that:
1. I have reviewed this quarterly report on Form 10-Q of V.F. Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
November 8, 2002
/s/ Mackey J. McDonald
-------------------------------
Mackey J. McDonald
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
31
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert K. Shearer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of V.F. Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
November 8, 2002
/s/ Robert K. Shearer
-------------------------------
Robert K. Shearer
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
32